Principles of Corporate Finance with Cdrom
Principles of Corporate Finance with Cdrom
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This paper presents a novel methodology to introduce the risk in the valuation of random investment projects. Traditionally, a constant risk-adjusted premium has been added up to the interest rate to include the uncertainty associated with the project. Nevertheless, this method is not objective because the choice of this parameter is not directly identified with a risk measure inherent to the project. Our approach is based on a model that describes the perception that the lender (supplier) has about the expected time to obtain the payment of debts (which will be identified with the cash flows). Thus we will be able to eliminate the subjectivity of traditional valuation methods when considering the risk in investment projects. © 2013 Wiley Periodicals, Inc.